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  • Monetary Economics (The Cagan Model) Nicola Viegi

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    aloprofundo
    79 tayangan17 halaman
    The document summarizes the Cagan model of hyperinflation. The model shows that expectations about future money supply determine current price levels, as prices jump in anticipation of expected future changes. Specifically, it analyzes how a one-time unexpected increase in the money supply at a future date T would lead prices to immediately "jump" as they incorporate expectations of higher inflation after the policy change at time T. It also discusses how to derive optimal constant money growth and inflation rates to maximize seignorage revenue collected by the government.

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    Monetary Economics (the Cagan Model) Nicola Viegi

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    The document summarizes the Cagan model of hyperinflation. The model shows that expectations about future money supply determine current price levels, as prices jump in anticipation of expected future changes. Specifically, it analyzes how a one-time unexpected increase in the money supply at a future date T would lead prices to immediately "jump" as they incorporate expectations of higher inflation after the policy change at time T. It also discusses how to derive optimal constant money growth and inflation rates to maximize seignorage revenue collected by the government.

    Hak Cipta:

    Attribution Non-Commercial (BY-NC)
    Unduh sebagai PDF, TXT atau baca online dari Scribd
    Tandai sebagai konten tidak pantas
    79 tayangan17 halaman

    Monetary Economics (The Cagan Model) Nicola Viegi

    Diunggah oleh

    aloprofundo
    The document summarizes the Cagan model of hyperinflation. The model shows that expectations about future money supply determine current price levels, as prices jump in anticipation of expected future changes. Specifically, it analyzes how a one-time unexpected increase in the money supply at a future date T would lead prices to immediately "jump" as they incorporate expectations of higher inflation after the policy change at time T. It also discusses how to derive optimal constant money growth and inflation rates to maximize seignorage revenue collected by the government.

    Hak Cipta:

    Attribution Non-Commercial (BY-NC)
    Unduh sebagai PDF, TXT atau baca online dari Scribd
    Tandai sebagai konten tidak pantas
    dari 17

    Monetary Economics: The Cagan Model

    Nicola Viegi

    August 2010

    Monetary Economics ()

    Lecture 2

    August 2010

    1 / 17

    Introduction

    Roles of money: medium of exchange, unit of account, and storage of value (often dominated by other assets). Money is macro model is typically identied with currency which gives no interest. The liquidity service of money ( medium of exchange) is emphasized, rather than store of value or unit of account. General Equlibrium models (Like RBC models) do not require money to specify a model with money we need to give it a function Agent will demand money only if it has a use

    Monetary Economics ()

    Lecture 2

    August 2010

    2 / 17

    Modelling Money

    Cagan Model - The Price of Money Money in Utility Function Approach Cash in Advance Models

    Monetary Economics ()

    Lecture 2

    August 2010

    3 / 17

    The Cagan Model

    Originally a model of Hyperination Main Point: Expectation about future fundamentals determine prices now Used extensively in Exchange rate analysis, assets prices A lot of modern models look like this

    Monetary Economics ()

    Lecture 2

    August 2010

    4 / 17

    The Model

    Money Demand Mtd = L (Yt , it ) Pt Fisher Equation

    (1 + it ) = (1 + rt )
    log approximation and uncertainty

    Pt +1 Pt

    log (1 + it ) = log (1 + rt ) + Et pt +1

    pt

    Monetary Economics ()

    Lecture 2

    August 2010

    5 / 17

    Assume Yt and rt xed, the money demand equation (in log):


    d mt

    pt = pt =

    (Et pt +1 (Et pt +1

    pt ) pt )

    mt or pt =

    1 mt + Et pt +1 1+ 1+

    Monetary Economics ()

    Lecture 2

    August 2010

    6 / 17

    Forward Solution

    pt

    = = =

    1 mt + Et pt +1 1+ 1+ 1 1 mt + Et mt + 1 + Et +1 pt +2 1+ 1+ 1+ 1+

    2 1 mt + Et m t + 1 + Et pt +2 1+ 1+ 1+ = ......... s T 1 T 1 mt + s + Et pt +T = 1 + s 1 + 1+ =0

    (1)

    Monetary Economics ()

    Lecture 2

    August 2010

    7 / 17

    Law of Iterated Expectations

    Et (Et +1 pt +2 ) = Et pt +2 No Bubble lim 1+


    T T

    T !

    Et pt +T = 0 1+
    s

    1 T ! 1 + lim

    s =0

    mt + s <

    Monetary Economics ()

    Lecture 2

    August 2010

    8 / 17

    Solution

    Generic Solution pt = 1 1+

    s =0

    1+

    mt + s

    Prices at time t depend on all future expected money supply. Expected fundamentals (not actual)

    pt e

    Monetary Economics ()

    Lecture 2

    August 2010

    9 / 17

    Constant Money Supply

    mt m Et m t + s = m

    (s

    0)
    s

    pt

    = =

    1 1+ 1 + s =0 1 1 m 1 + 1 1 +

    = m

    Monetary Economics ()

    Lecture 2

    August 2010

    10 / 17

    Future One Time Money Increase at T>0

    Consider an surprise announcement at time t = 0 of a change of policy at some time in the future T > 0 m t<T m0 > m t T

    mt = Thus

    pt =

    m t<T m0 t T

    How would the transition look like?

    Monetary Economics ()

    Lecture 2

    August 2010

    11 / 17

    Solution

    In the period between 0 1 1+

    T
    s

    pt pt pt

    s =0

    1+ 1+
    T t

    m+
    T

    1 1+

    s =T

    t s

    1+ m0 m

    m0

    = m+ = m+

    1 1+ 1+

    s =0

    1+

    m0

    Monetary Economics ()

    Lecture 2

    August 2010

    12 / 17

    Solution
    log price level

    p0
    m

    time

    Prices "Jump" at the announcement, before the policy is implemented Expectations drive economic dynamics
    Monetary Economics () Lecture 2 August 2010 13 / 17

    Seignorage

    St Rewrite St Mt Mt Pt
    1

    Mt

    Mt Pt

    Mt Pt

    Mt Pt

    1 1

    Mt Pt

    1 1

    Mt 1 Pt

    Seignorage = Increase in real balance+"Ination Tax"

    Monetary Economics ()

    Lecture 2

    August 2010

    14 / 17

    Optimal Seignorage

    St Cagan Money Function

    Mt

    Mt Pt

    Mt

    Mt Mt

    Mt Pt

    Mt = Pt

    Pt +1 Pt

    Constant gross money growth rate (1 + ) , constant ination

    Mt Pt = (1 + ) = Mt 1 Pt 1

    Monetary Economics ()

    Lecture 2

    August 2010

    15 / 17

    Optimal Seignorage
    Constant Seignorage S FOC dS = (1 + ) d
    (1 + ) (2 + )

    (1 + ) (1 + )

    = (1 + )

    (1 + )

    0 =

    (1 + ) (1 + )
    (2 + )

    opt

    = [1 + 1 =

    (1 + )] (1 + )

    Monetary Economics ()

    Lecture 2

    August 2010

    16 / 17

    Cagan puzzle
    Under hyperination, actual money growth much higher (wrong side of Laer curve). Obstfeld-Rogo: Absence of commitment, time-consistency problem? Promise = 1/ ) M/P = [(1 + )/ ] . For given M/P , S = (M/P )/(1 + ). Temptation to one-time increase in . New equilibrium under discretion, smaller M/P, higher . Note: Other budgetary consequences of surprise ination (value of outstanding nominal debt). Seignorage in industrialized countries small relative to government spending and GDP (less than 1% of GDP) (Obstfeld-Rogo, box 8.1) Seignorage more important in developing countries

    Monetary Economics ()

    Lecture 2

    August 2010

    17 / 17

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